By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.
Six NGO-microfinance institutions (MFIs) provide Islamic micro-financing Al-Murabaha to over 7,000 micro-enterprises, 14% of them women-owned small businesses across Anbar, Kirkuk, Ninewa, and Tikrit. Al-Takadum in Al-Anbar pioneered micro-financing based on Islamic principles in 2007 and has branches in all major cities of the governorate. Islamic microfinance represents a confluence of two rapidly growing domains in Iraq: microfinance and Islamic finance. There are seven banks providing Islamic finance in Iraq, however both banks and non-banks such as the NGO-MFIs face difficulties in expanding their services in the absence of distinct regulatory frameworks for Islamic finance and a national Shari’a Board.
In Iraq, Islamic finance is still in its infancy, and business models are just emerging. The range of Islamic finance products available and their outreach is influenced by a variety of factors, with regulatory environment surrounding Islamic finance as critical point of constraint. Shari’a-compliant microfinance has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor. Unlocking this potential in Iraq is the key to providing financial access to the Muslim poor who currently reject microfinance products that do not comply with Islamic law or those who use conventional products but prefer Islamic ones.
The introduction of Murabaha lending in the Iraqi microfinance sector (Iraqi microfinance industry includes 14 MFIs and 70,000 clients from the low-income population segment) has enabled MFIs to reach out to a larger number of clients traditionally excluded from the financial sector. Given the young history of the industry against the backdrop of insecurity, microfinance is increasingly recognized as the only channel through which people without tangible collateral can access financing. It is imperative for the Iraqi microfinance sector to continue providing religiously acceptable loan products to achieve the overall objective of poverty reduction and entrepreneurship. The need to conform to certain religious principles affects the structure and development of Islamic MFIs. It is essential, therefore, to seek approval from qualified Islamic scholars particularly before developing new financial instruments.
While each Islamic bank has its own Shari’a boards, there is tremendous information asymmetry on Shari’a compliance across banks as well as the missing regulatory frameworks for deepening Shari’a products and investments in the country. In the absence of Central Bank laws pertaining to Islamic finance and Islamic microfinance, Islamic MFIs rely on Fatwas issued by religious leaders of a province. Consequently, Islamic MFIs and others offering Islamic microfinance Murabaha products often face challenges in understanding what constitutes Shari’a compliance. Since Shari'a law is not a single codified body of law and is open to interpretation, the opinions of Shari'a scholars may differ on the same question of Shari'a law depending on the school of thought to which particular scholars belong.
Experience in Al Takadum MFI demonstrates the time consuming process the MFI had to undergo in order meet with different local sheikhs in different cities of the same province in order to discuss what constitutes Murabaha transaction. They face the unique challenge of Shari’a compliance in their operations and accounting/MIS practices, with the added complexity from the breadth of a Murabaha transaction. In the absence of a national Shari’a board, Islamic finance is defined by a broad spectrum of religious leaders and can create significant challenges leading to misinterpretation and malpractice.
Despite regulatory gaps, MFIs offering Islamic microfinance Al-Murabaha have prospered due to increased demand for Shari’a compliant products in Iraq. Islamic microfinance Murabaha portfolio grew at a rate of 68% compared to the average microfinance industry growth rate of 36%. Despite high growth rate, at only 10% of total industry portfolio, scale is vital to driving down cost-income ratios for Islamic MFIs so that they may in turn serve a greater number of small businesses at affordable market-based price.
Note: The Iraqi microfinance industry is supported by a range of donors with USAID playing a pivotal role in sector development. USAID-Tijara continues to provide technical assistance to the microfinance industry (read more at www.tijara-iraq.com).
T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy (www.ideas-sYnergy.net), an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.